Société Générale | The Finlay Centre for Corporate & Public Governance

More Shockers from Société Générale: Why Didn’t Zay Just Leave Zee Keys to Zee Vault on Zee Cafeteria Table?

The special board committee which is investigating the $7 billion trading fraud at Société Générale issued its interim report today. What stands out is the conclusion found at point 9 of the English summary.

9. The author of the fraud began taking these unauthorised directional positions, in 2005 and 2006 for small amounts, and from March 2007 for large amounts. These positions were uncovered between January 18th and 20th 2008. The total loss resulting from these fraudulent positions has been identified and amounts to 4.9 billion euros, after their unwinding between January 21st and 23rd 2008.

What the board is admitting is that a lone trader, and a fairly junior one at that, was able to hoodwink the entire internal control and security apparatus of one of the largest and most respected banks in Europe from 2005 until January of 2008. Do they really think these findings will arrest the fears of the investing public and restore faith in the bank? Far from getting management and the board off the hook, the report serves as a stinging self-indictment of a financial institution that was so inept in its security it might as well have left the keys to the vault on the cafeteria table.

But there is more.

10. The General Inspection department believes that, on the whole, the controls provided by the support and control functions were carried out in accordance with the procedures, but did not make it possible to identify the fraud before January 18th 2008.

Controls were carried out in accordance with zee procedures? Allo? Eez anybody hat zee home? Surely Inspector Clouseau had some part in this investigation. The controls worked –except for the fact that $7 billion was lost. Does somebody fall down the stairs next or have their false nose go up in flames? This is a Blake Edwards production if ever there was one.

Nice to have you back, Monsieur. We look forward to zee next hact.

Nominate Your Dog to the Boardroom

If the boards of Merrill Lynch, Citigroup, Bear Stearns, Société Générale, Countrywide and UBS were comprised entirely of Irish setters and beagles, it is doubtful that the subprime-plagued results of recent months could have been any worse.

Some of the senior staff of Finlay ON Governance have suggested that I might have given the wrong impression about Irish setters being rather high maintenance and posing some challenges during puppyhood. My comments were made while applauding the breakthrough of Uno, the first beagle to win the top spot in the 132-year history of the Westminster Dog Show.We’re not the only former beagle owners who were impressed with the win. CBS’s Face the Nation host, Bob Schieffer, also got a chuckle out of it while praising his previous three hounds.The connection between between good, reliable people who project a strong moral compass, like Bob Schieffer and my late grandfather, and the beagle breed, is interesting. Perhaps it’s an encouraging sign that more of the world is starting to appreciate the beagle, too.It is correctly pointed out by certain on site advisors to these pages, however, that Muldoon Dewitts Great One (Piper), Westminster’s Irish setter best in breed for 2008, is a cousin of my Springtime Treat (Holly, pictured above). They share some of the same illustrious ancestry. Holly is the great-granddaughter of Impresario, who was Best in Show, American and Canadian Champion, 1987. Piper is Impresario’s great-great grandson.Staff, who are renowned for their persistence especially during pre-set times for walking, further wish it to be noted that no Irish setter has been complicit in any of the subprime/credit shenanigans that have produced record losses in several of the world’s top banks and appear to be driving the economy into recession. Nor has any Irish setter, or any other dog for that matter, been part of a board which awarded tens of millions in compensation to CEOs who led their companies so deep into the red that they must now turn to the sovereign wealth funds of despotic regimes to bail them out. They conclude that if the boards of Merrill Lynch, Citigroup, Bear Stearns, Société Générale, Countrywide and UBS were comprised entirely of Irish setters and beagles, it is doubtful that the subprime-plagued results of recent months could have been any worse.There may be some merit to this position. Most dogs don’t possess the qualities associated with the typical director. Canines seldom sleep during times of crisis and are generally curious about what’s happening around them. Most would never lose $7 billion and, if they did, would quickly know exactly where to retrieve it. The loyalty of a well-bred dog is always toward its master and family.The loyalty and good judgment of directors tends to be somewhat more problematic.

Outrage of the Week: The Failure of Financial Guardians to Protect the World from Mr. Average

Trying to turn Jérôme Kerviel into the Lee Harvey Oswald of the banking world won’t fly. There is much more to be suspicious about when it comes to the role of his superiors at Société Générale and the governance failings of global financial institutions.

The disclosure that a lone trader’s unauthorized transactions had caused Société Générale to lose more than $7 billion prompted us to respond with a loud “Incroyable!” But when it was said that the bank’s efforts to minimize its losses may have led to the market meltdown that saw $1 trillion obliterated from stock markets worldwide, one could only think “C’est impossible.”

But of course, both situations were eminently plausible. (more…)

The Ghost of Barings Haunts Société Générale, and So Do Its Weaknesses

Something has gone fantastically awry in the risk management and oversight of some of the world’s most renowned investment bankers and financial institutions. The shortcomings in their controls and governance systems that permitted multi-billion dollar losses at Citigroup, Merrill Lynch, Bear Stearns, UBS and Swiss Re, and the overall failure of top management and boards to comprehend the risks of the subprime related investment vehicles they were packaging and selling, has been a recurring theme at Finlay ON Governance in recent months. We were taken aback, as we noted last week, when new Merrill Lynch CEO John Thain told the Wall Street Journal “Merrill had a risk committee. It just didn’t function.”

But nothing has been as breathtaking as the loss of more than $7 billion by Société Générale, apparently the result of a rogue trader acting on his own. (more…)